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ABSTRACT
The present article seeks to analyze the legacy and its persistence over time
in terms of financing and operational policies and financial performance, of
companies invested by Private Equity and Venture Capital funds (PE/VC).
The PE/VC industry is characterized by the function of identifying compa-
nies with large return potentials and that grow arithmetically – due to capital
constraints – to provide adequate and necessary sources of capital and ex-
perience for exponential growth. In this study, we used four measures that
relate to companies’ financial policies and their persistence over time: i) cash
& equivalents; ii) leverage; iii) Return on Assets (ROA); and iv) sales growth.
The results suggest that PE / VC invested companies imply higher levels of
cash & equivalents and are associated with a lower level of leverage during the
first 5 years after the IPO. In addition, companies financed by PE/VC funds
show higher profitability and higher sales growth compared to non-invested
companies in the short term, i.e., in the first 3 years after the IPO.
Keywords: Venture Capital; Operational Performance; Financial Performance;
Initial Public Offering of Shares.
1. INTRODUCTION
Venture capital funds, commonly known as Venture Capital and Corresponding author:
Private Equity (PE/VC), seek emerging companies that have competi- Fundação Getulio Vargas Escola de
†
Lotus, Cisco, Staples, Federal Express and Netscape were invested by Published Online: 11/07/2018.
PE/VC funds and formed completely new industrial segments. When DOI: http://dx.doi.org/10.15728/bbr.2019.16.1.6
This work licensed under a Creative Commons Attribution 4.0 International License.
BBR
analyzing the American stock market, about 30% of companies listed on the stock exchan- 16,1
ge between 1991 and 1997, had received resources from PE/VC. These companies cons-
tituted about 20% of the total value of these emissions (GOMPERS and LERNER, 1999).
According to Kreps (1990) and Hermalin (2001), corporate culture is important to un- 88
derstanding the company’s strategic choices and financial performance. Corporate culture
can be defined as a specific set of norms, beliefs, values, and preferences that are shared
between executives and workers. Therefore, company culture can be fundamental in its
strategic choices, because it defines an “aligned” behavioral profile when their managers
are faced with unforeseen contingencies or multiple equilibria (KREPS, 1990).
In this context, the present article seeks to analyze the legacy and its persistence over
time in terms of financing policies and financial performance, of companies invested by PE/
VC funds. We used four measures similar to those by authors Cronqvist, Low and Nilsson
(2009) which relate to companies’ financial policies and their persistence over time: i) cash
& equivalents; ii) leverage; iii) Return on Assets (ROA); and iv) sales growth. The analysis
seeks to verify the legacy, in terms of culture of financing policy and performance, which
the PE/VC funds leave in the companies invested after the IPO.
The results show that companies financed by PE/VC funds have a higher level of cash &
equivalents in the first 5 years after the IPO. This result can be explained in parts by the fact
that these companies are generally new and with high potential for growth. In this sense,
the high level of cash & equivalents may reflect the choice to distribute less dividends and
reinvest capital in new opportunities.
Under the same rationale, companies invested in PE/VC funds have a lower leverage ra-
tio in the first 5 years after the IPO, in comparison with those not financed by PE/VC. These
companies, in addition to having more capital options, must return to the PE/VC funds the
investments made by them. Carvalho et al. (2013) show that 25% of the exit from invest-
ment of PE/VC funds between 2004 and 2009 were through IPO. In this sense, companies
invested by PE/VC are more likely to issue shares instead of debt.
The present study also found evidence that companies financed by PE/VC have a higher
level of profitability - as measured by ROA - in the short term, i.e., in the first three years
after the IPO. In the same direction, companies financed by PE/VC show a higher level of
sales growth in the first 3 years after the IPO.
The paper is structured as follows: section 1 begins with the introduction; section 2
presents the literature, seeking to highlight the main studies related to PE/VC found in
Brazil and in other countries. The methodology and sample, as well as the application of
the proposed models, can be found in section 3. Following, we present the results and their
implications in section 4. Final considerations conclude the study.
2.1. Hypotheses
Companies that distribute much of their income in the form of dividends are less likely
to accumulate cash on their balance sheets, or they feel obliged to spend on marginal ac-
quisitions or investments. Jain, Shekhar and Torbey (2009) show that companies invested
by PE/VC are young and growing companies, so these companies tend to distribute less
dividends from their earnings.
In addition, as funders, PE/VC often oversee managerial decisions (CARPENTER
et al., 2003; VAN DER BERGHE and LEVRAU, 2002). The hypothesis of alignment
of interests suggests that the existence of large shareholders improves the protection
of minority shareholders, leading to a positive effect of the presence of PE/VC on cash
& equivalents. Chen and Chuang (2009) emphasized the relationship between Venture
Capitalists (VCs) and the impact on cash & equivalents. According to the authors, the
hypothesis of alignment of interest suggests that shareholders are more likely to accept
large cash reserves to finance new investment projects.
In the case of the Brazilian capital market, the obligation to distribute dividends is
provided for in articles 202 to 205 of the Law 6,404 of 1976, known as public com-
panies law (ARAÚJO, 1996). In accordance with the provisions of Article 202, such
BBR companies must distribute at least 25% of adjusted net income, when the status of the
16,1 corporation is omitted. However, there may be situations where the statute establishes
values below this threshold1, which in practice causes a permutative set about how
Brazilian companies will pay dividends to their shareholders. In this context, the pre-
91 sence of risk investors may have a positive effect on cash & equivalents of investees
in the years preceding the IPO as such investors taking advantage of Article 202 of the
(S.A) Corporation Law, can reduce the percentage of dividends paid resulting in gre-
ater retention of cash and cash & equivalents. Given this context, the first hypothesis
can be formulated as follows:
Hypothesis 1: Companies financed by PE/VC have higher levels of cash & equivalents
after the IPO compared to those not financed by PE/VC.
The second objective of the article is to analyze how the presence of PE/VC funds
affects the financial structure of the company in the coming years after the IPO. These
funds can play an important role in the transmission of the intrinsic value of the com-
panies invested to the financial market, thereby reducing the degree of information
asymmetry. The reduction of information asymmetry, in turn, may influence various
aspects of the company’s financial policy (see, for example, Myers and Majluf (1984)).
Singularly, this implies that companies financed by PE/VC may be more likely to issue
shares (since they are more likely to get a fair price for their stock), so they will have
lower levels of leverage. Thus, if PE/VC funds are able to prove the intrinsic value of
invested companies and thus reduce the degree of information asymmetry, the compa-
nies financed by PE/VC will be associated with lower leverage ratios. Therefore, we
formulate the second hypothesis as follows:
Hypothesis 2: Companies financed by PE/VC have lower leverage levels after the IPO
compared to those not financed by PE/VC.
With regard to the ROA variable, Morsfield and Tan (2006) argue that companies inves-
ted by PE/VC funds tend to have on average, better performance in their investments when
compared to those not invested by PE/VC. Therefore, we formulate the third hypothesis as
follows:
Hypothesis 3: Companies financed by PE/VC show higher levels of profitability after
the IPO compared to those not financed by PE/VC.
Finally, another way of measuring the operational performance of companies is through
their sales performance. Regarding the variable sales growth, Puri and Zarutskie (2012) re-
port that PE/VC-funded firms grow faster in terms of sales than non-funded firms do. This
result is persistent mainly in the early years, before the stabilization of growth.
The studies conducted by Paglia and Harjoto (2014) also show that companies financed
by PE/VC have a positive impact on sales growth. The authors state that this result persists
for three consecutive years after the start of the investments made by the PE/VC funds.
Additionally, Chemmanur et al. (2011) show that the total efficiency gains generated by
PE/VC come mainly from a high sales growth in the years following the receipt of venture
capital. Therefore, we can formulate the fourth hypothesis as follows:
Hypothesis 4: Companies financed by PE/VC show higher levels of sales growth after
the IPO compared to those not financed by PE/VC.
3. METHODOLOGY
In the present study, we used four measures for the company’s financial policy: i) cash
& equivalents; ii) leverage; iii) Return on Assets (ROA); and iv) sales growth. These mea-
sures are based on Cronqvist, Low and Nilsson (2009).
1
See, for example, the Notice of Shareholders of the OGX – OGX: Dividend payment (June 23, 2009).
The hypothesis of the proposed study refers to the difference between companies finan- BBR
ced by PE/VC and not financed by PE/VC in terms of financial policy and its persistence. 16,1
The equation that tests the four hypotheses can be defined as follows:
We can observe the same pattern for other variables, such as ROA and sales growth.
However, for sales growth, the difference decreases over time and reverts 4 years after the
IPO.
Regarding the level of leverage, invested and non-invested companies by PE/VC are
also different. For the PE/VC sample, the mean for leverage is 14% one year after the IPO,
whereas for the non-PE/VC sample, it is 42.0%. This difference is persistent in the 5 years
after the IPO. Similarly, we can observe a similar pattern for other variables such as fixed
assets, size and companies in the technology sector.
The persistence of these differences can be understood, in parts, as a legacy (fixed effect)
that PE/VC funds leave in invested companies. Cronqvist, Low and Nilsson (2009) evi-
dence that the financing and investment policies of companies are persistent over time. In
the same direction, we can observe in these results that the legacy of PE/VC funds tends to BBR
remain in invested companies even 5 years after the IPO. 16,1
4. RESULTS
94
In this section we present the results obtained with the estimations of the statistical mo-
dels respectively oriented by the establishment of the hypotheses in section 3.
The results we found are consistent with Chen and Chuang (2009), which highlight the
relationship between the Venture Capitalists (VCs) and their positive impact on cash and
cash & equivalents. In addition, the results are also in line with Carvalho, Pinheiro and
Sampaio (2015), that even by analyzing US companies, also found high levels of cash &
equivalents for companies financed by PE/VC. These results persist for at least 8 years after
the IPO.
The higher level of cash & equivalents of the companies invested by PE/VC may be
BBR related to the fact that these companies finance part of their growth with liquidity. As they
have a significant need for working capital due to rapid growth that they present; therefore,
16,1 higher cash levels can finance their operating activities without the need to resort to borro-
wing repeatedly.
95
4.2. Leverage
Table 4 suggests that PE/VC invested companies are associated with a lower level of
leverage during the first 5 years after the IPO.
Table 4. Leverage
The dependent variable is the leverage of year 1 to year 5 after the IPO. The robust t (or z) statistics on
heteroscedasticity by White’s (1980) method of correction are presented in parentheses.
Year 1 2 3 4 5
VC dummy -0.365*** -0.313*** -0.236*** -0.221** -0.189*
(-4.48) (-4.12) (-3.03) (-2.14) (-1.85)
Net 0.000 0.000 0.006** 0.005** 0.006***
Fixed Assets (0.17) (0.32) (2.37) (2.56) (2.69)
Size 0.280*** 0.249*** 0.296*** 0.324*** 0.263***
(6.11) (4.89) (7.22) (7.89) (6.86)
Sales 0.102 -0.266 -0.248 0.065 -0.181
Growth (0.77) (-1.62) (-1.37) (0.33) (-0.87)
Earnings -0.001* -0.012 -0.001 -0.011** 0.000
Management (-1.68) (-0.51) (-1.41) (-2.06) (1.29)
Technology Sector -0.016 -0.129* 0.128 0.145 0.041
(-0.14) (-1.83) (0.97) (1.39) (0.46)
IFRS dummy -0.127 -0.152* -0.213** -0.140 0.001
(-1.56) (-1.86) (-2.23) (-1.33) (0.02)
Sector dummy (SIC-2) Yes Yes Yes Yes Yes
Time dummy (year) Yes Yes Yes Yes Yes
Observations 150 150 150 150 150
R-squared 0.487 0.485 0.564 0.577 0.536
*, ** and *** denotes significance at levels of 10%, 5% and 1% (for two-tailed tests), respectively.
In terms of company characteristics, larger companies in terms of total assets imply hi-
gher levels of leverage in the first five years after the IPO. Companies with a higher level
of fixed assets have higher levels of leverage in the medium term, that is, from the third to
the fifth year after the IPO.
These results are consistent with Myers and Majluf (1984), which show that the reduc-
tion of information asymmetry, can influence various aspects of the company’s financial
policy. Since PE/VC funds play an important role in transmitting the intrinsic value of
invested companies to the financial market, they tend to reduce the degree of information
asymmetry. In addition, companies financed by PE/VC may be more likely to issue shares,
since the exit of these funds is in part via IPO. Carvalho et al. (2013) show that 25% of
exits from PE/VC funds between 2004 and 2009 were through IPO. Carvalho, Pinheiro and
Sampaio (2015) also found evidence that US companies funded by PE/VC are associated
with a lower level of leverage for at least 8 years after the IPO.
The lower level of leverage of the companies invested by PE/VC in Brazil may be related
to economic aspects. One aspect of the Brazilian economy that inhibits investments in pri-
vate equity is the low availability of credit and the reduced possibility of leverage. Private
equity funds in the US, especially those specializing in Leverage Buy Outs, work with high BBR
leverage ratios that can reach 4 USD in debt for every dollar invested (SCHIFRIN, 1998). 16,1
In Brazil, the scarce availability of resources and the cost of credit operations imply a redu-
ced participation of debt in the capital structure of companies in which PE/VC funds invest.
96
4.3. Roa
Companies invested by PE/VC funds are younger and have significant growth potential.
Table 5 shows that these companies are more profitable compared to companies not inves-
ted by PE/VC, in the first 3 years after the IPO. In terms of characteristics of the company,
companies with higher sales growth, tend to present a higher level of profitability - measu-
red by ROA.
Table 5. ROA
The dependent variable is ROA from year 1 to year 5 after the IPO. The robust t (or z) statistics on
heteroscedasticity by White’s (1980) method of correction are presented in parentheses.
Year 1 2 3 4 5
VC dummy 0.788*** 0.730*** 0.533** 0.365 0.310
(2.91) (3.25) (2.09) (1.51) (1.24)
Net -0.000 -0.000 0.000 -0.001 0.039*
Fixed Assets (-0.65) (-0.56) (0.01) (-0.44) (1.88)
Size -0.013 -0.033 -0.020 0.006 -0.053
(-0.22) (-0.76) (-0.44) (0.12) (-1.10)
Sales 0.073* 0.529** 0.875** 0.665** 0.410*
Growth (1.72) (2.10) (2.43) (2.15) (1.79)
Earnings 0.001*** 0.013*** 0.011*** 0.001*** 0.001***
Management (5.08) (4.32) (5.18) (8.51) (4.96)
Technology Sector -0.351 0.049 -0.120 -0.010 0.050
(-1.46) (0.41) (-0.65) (-0.04) (0.24)
IFRS dummy -0.213 -0.152 0.014 -0.119 -0.121
(-1.21) (-0.99) (0.07) (-0.83) (-0.76)
Sector dummy (SIC-2) Yes Yes Yes Yes Yes
Time dummy (year) Yes Yes Yes Yes Yes
Observations 150 150 150 150 150
R-squared 0.096 0.131 0.145 0.164 0.192
*, ** and *** denotes significance at levels of 10%, 5% and 1% (for two-tailed tests), respectively.
This result is consistent with Morsfield and Tan (2006), in which they argue that com-
panies selected for investments in PE/VC funds may have, on average, better performance
than the rest.
Caselli (2009) analyzed 804 investments made by 87 channels of Investments of 58 PE/
VC Management Organizations in Italy in the period of 1999 – 2005 and divested not be-
fore 2007. The results found indicated an average IRR of 33.17% in their study and point
out that the highest returns are obtained through the Buyouts stage. The investment in PE/
VC surpassed the stock market (17.95%) - in that sample period of poor performance of
the stock market - at almost double the profitability and returned four times the government
bonds – 2 years government bonds. The author also concluded that the IRR is driven by
sales growth, return on assets (ROA) and return on equity (ROE).
The higher levels of return on assets of companies invested by PE/VC may be related
to the fact that these funds participate actively in the management of these companies. In
BBR general, PE/VC funds have seats on boards of directors and are also active managers in the
16,1 operations of investees. The objective of the active participation of these funds is to impro-
ve the operational efficiency and the management of these companies.
4.5. Robustness
The purpose of this study is to analyze the relationship between financial policies and
operational performance between companies financed and non-financed by PE/VC, and its
Table 6. Sales Growth
The dependent variable is the Sales Growth of year 1 to year 5 after the IPO. The robust t (or z) statistics
on heteroscedasticity by White’s (1980) method of correction are presented in parentheses.
Year 1 2 3 4 5
VC dummy 0.075** 0.039* 0.093** 0.001 0.024
(2.56) (1.71) (2.16) (0.02) (0.60)
Net -0.000 -0.000 0.001 0.000 -0.002
Fixed Assets (-0.39) (-1.14) (1.63) (0.50) (-1.23)
Size 0.008 0.002 0.011 -0.008 0.014
(0.98) (0.25) (1.07) (-0.93) (1.58)
Sales -0.001 0.001 0.013 0.001*** 0.001*
Growth (-1.15) (1.25) (0.30) (2.69) (1.68)
Earnings 0.077*** 0.088** 0.031** 0.124*** 0.032*
Management (2.94) (2.45) (1.97) (3.43) (1.72)
Technology Sector -0.015 0.002 -0.025 0.029 -0.040
(-0.53) (0.09) (-0.66) (0.68) (-1.14)
IFRS dummy Yes Yes Yes Yes Yes
Yes Yes Yes Yes Yes
Sector dummy (SIC-2) 150 150 150 150 150
Time dummy (year) 0.135 0.154 0.165 0.192 0.214
*, ** and *** denotes significance at levels of 10%, 5% and 1% (for two-tailed tests), respectively.
persistence over time. In an ideal experiment, it would be possible to observe the financial BBR
policy of companies financed by PE/VC and the financial policy that these same companies 16,1
would experience if the capital contribution of PE/VC funds was not received. This would
allow us to make causal inferences about the effect of the capital contribution of PE/VC
funds on the financial policy of companies. Unfortunately, given the non-experimental na- 98
ture of the data, what is really possible to observe is the financial policy of the companies fi-
nanced and non-financed by PE/VC. In this case, the problem is that the PE/VC investment
is not distributed randomly, introducing a selection bias, which can generate complications
in cases of inferences.
To reduce this bias, we used a methodology similar to Lee and Wahal (2004), in which it
endogenizes the receipt of capital contribution by PE/VC funds and does not impose line-
arity and even restrictions in the functional form. In this sense, each company financed by
PE/VC must be combined with one or more companies not financed by PE/VC considering
the same two-digit SIC code and that are similar in relation to company size, measured by
total assets. In addressing this issue of endogeneity, caused by the selection effect that may
exist when choosing the investments of PE/VC funds, we can observe that the results are
similar to the results presented in this study.
Table 7 presents the results for the difference in financial policies and operational per-
formance of companies financed and not financed by PE/VC. Each funded company was
combined with one or more non-funded companies using the Propensity Matching Score
(PMS). The estimators, in this structure, establish a comparison between companies finan-
ced and not financed by PE/VC that are similar in terms of observable characteristics, such
as industry and size. We performed the PMS considering all companies invested by PE/
VC, where for each of them we use as counterfactual, being a single non-invested com-
pany, following Almeida et al. (2011). We also followed the recommendation by Roberts
and Whited (2013), for which we applied the substitution of the correspondence procedure.
After the correspondence procedure, there were 40 invested companies and 40 control com-
panies (not invested by PE/VC)”.
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